Thursday, February 4, 2010

Networking giant Cisco (CSCO) beat earnings by about 5cents last night, reporting fiscal q2 EPS of 40cents per share versus the 35cents expected. Revenue of $9.8billion were up 8% versus company guidance for 1-4% year-over-year growth. Shares are up about 1 % in the first few minutes of trading.

One of the most heavily scrutinized companies in the market (31 analysts publish earnings estimates for 2010), it's usually considered standard operating procedure for Cisco to come in a penny or two ahead of consensus. But 5cents, on 5.8billion shares outstanding, is quite significant. Gross margin declined from the previous quarter, but diligent expense management allowed operating margin to increase 1% sequentially. Cash and equivalents on the balance sheet ended the quarter at $39.6billion, or $6.75 per share.

On last night's earnings conference call, CEO John Chambers boosted the coming quarter's revenue guidance to $10.2billion, above the street at $9.5billion. That would be 25% revenue growth from the third quarter of last year. Robust to say the least. His comments were as bullish as we've heard in some time, a great sign for the coming 12months.

In addition to upbeat revenue guidance on the conference call, CEO John Chambers warned investors that while he is very positive on the current phase of this recovery, he noted uncertainties regarding the strength of this recovery and the weak employment situation.

Based on my estimates for 2010 and 2011 Free Cash Flow, and putting a 7% Free Cash Flow Yield on the shares, I see a fair value for Cisco of at least $35 and likely closer to $37 as we progress through 2010, well above the current $23.30. For those that think that's a low yield, it amounts to only 15times Free Cash Flow, and is healthily above Cisco's cost of Capital, illustrated below with its 2016 bonds trading to yield only 3.35%. Cisco is headed higher, and I still own it and recommend owning it. In addition to that, it's another important driver of DJIA upside..